Heidelberg Materials AG

XMUN:HEI

Earnings Call Transcript 2022-Q2

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Good afternoon, good morning to all of you listening to our H1 Conference Call. We are in the room together with Dominik and Rene and Ozan. Look forward to your questions later. But before we come to the questions, we have some prepared remarks that we want to make.

Over to you, Dominik.

[Dominik von Achten, Chief Executive Officer]

Very good. Hello also from my side, great that you are joining. Thanks so much for that. I think we've shared with you the presentation. So I will go through that fairly quickly because as usual, we should focus on your questions. I'm sure you have some. So for us, it was all about, as we said now for many quarters, it was all about getting the pricing moving.

There was an underlying assumption also of many of you that the company would not have the ability to move the top line, especially on the pricing side. I think we have delivered on that. Strong pricing drives the top line growth and stabilizes the results, plus 10% on the revenue side, just minus 6% on EBITDA and RCO. And the key points, and we will go into that detail is the price over cost, and I will show you the details later. Key message is, it has clearly stabilized and turned even positive in the month of June.

We are in a quarter-over-quarter race, I get it, but we are also in there for the midterm and the long-term. And that's why going back to our five promises from the capital market is utterly important for us to hold the line on that one. Promise #3 is focused on the 400 kilograms, the most ambitious target in the industry by far. And that's why it was also important for us to get traction even before the CCUS projects kicking in, in 2024 already.

And here, we are another 2.5% down versus a good performance already prior year. So we really do see traction in each of the countries. And by the way, this is not only delivered from mature markets, it is also delivered from emerging markets, very important to understand. Then we have already shared with you the renewal of the syndicated loan. Maybe René can say something to that later on when we go through the financial side.

And then outlook, we confirm the outlook on the top line, strong revenue growth. And we slightly adjusted it on the EBITDA and RCO piece. I'm sure you will have some questions around that. We go to a slight decrease in 2022 for the full year. And it's really given the recent days and weeks of energy cost volatility especially in Europe. I think it's prudent to say, guys, this is something we have to flag to the capital markets. That is something we try our very best to manage, but this volatility is so high that I think it's fair to be cautious. I'd say also very clearly, our internal fighting target remains to stay on the old guidance, but that's just for your reference.

Page 4 then shows the Q2 results. Double-digit percentage growth on the top line, more than €5.5 billion. And then the operating EBITDA and the operating EBIT is slightly down from a record last year, agreed, but we were also going against a very strong comparison last year.

H1 2021, just to remind you, was the best by far in the company's history. And if you put it into a longer-term perspective, we are clearly ahead in EBITDA and EBIT, both versus 2020, okay, there was a little bit corona, but even against 2019 by a substantial way. So margin a little bit under pressure, clear over that energy cost rise. But overall, I think, okay.

If you then go to the development per region, you see that the top line has really moved in Western Southern Europe and NEECA as well as in Africa. I think those three areas have really done an excellent job on the top line, double-digit percentage growth. North America, a little bit slower, but also plus 6% and Asia Pacific also a little bit slower plus 8%. if you go to the next page, you see that the EBITDA development is stellar, I say that in WSE. I think that that's the EBITDA development basically per area. You have that in the details, I think, there.

Let's go to Page 7 then. Yes, let's go to Page 7 first, sorry. You see here the like-for-like comparison. You see that there is a significant currency impact. You also see that there is a significant scope impact, that's mainly the West Coast in the U.S. And you see that the H1 operating EBITDA was clearly negative in the price over cost. And that's what I was alluding to earlier. That's very much driven by a not so good H1 -- sorry, Q1, but Q2 was again much better. You see on the next page. Maybe you flip back and forth a little bit because it's interesting to see the delta.

So while in H1, it was a smaller volume impact, but a massive price over cost impact to the negative. You see that in the Q2, this has clearly turned around. A little bit higher on the volume side, but almost fully closing the gap on price over cost. I think that's really going in the right direction. In that respect, I think, let's go to the next page.

We see a little bit of development on the commercial excellence program. And that's what I was alluding to earlier. We are coming out of four very negative quarters. Q2 last year, Q3 last year, Q4 last year and Q1 this year with very negative price over cost development. And then you see to the right, how we turned this around. We -- I mean, there were questions from some of you in the Q3 call last year, but also in the Q1 call this year, when is this going to stay positive. We said, okay, hopefully in the second half. We’ve managed to turn this positive already in June and almost positive for the full quarter of Q2.

So I internally said thank you very much. Great performance together with our customers. I think the team internally did an excellent job. And that's obviously on the back of steep price increases. You see on the left a good trajectory. The trend is absolutely moving in the right direction.

And that then also leads to the fact, while we announced last year €350 million commercial contribution to the commercial excellence program, we’ve upgraded this to €2 billion, and out of that, we have already June year-to-date secured €800 million. So we are very confident that we get to those €2 billion until year-end. And maybe, René, you want to continue?

[Rene Aldach, Chief Financial Officer]

Yes. Thanks, Dominik. Hello, everyone from my side. Revenue and EBITDA, I think Dominik has just discussed. So if you look the net clean earnings per share, and that means without our additional ordinary results, which includes impairments, bookings, you name it. We go up by plus 3% even though with an EBITDA, which is about 12% like-for-like lower, and we come to the details below RCO in the next slides.

Net debt reduction is favorable by minus €662 million, and our leverage now for June is 1.85x. And we come to the cash flow net debt as well in a few seconds. And then we've distributed, let's say, €1.3 billion to the shareholders. So this is obviously the split is the normal dividend, the dividend to minorities. And the share buyback, where you all know we finished the second tranche in mid of July.

If we go to the next slide, here, the free cash flow last 12 months and net debt development. If we talk about the free cash flow, you see here the different components. And we had the tax payments and interest payments, that's, let's say, as expected, interest payments are very low compared to prior year as well. So there you see our efforts to reduce the interest charges here as well.

Taxes is obviously normal -- the normal tax payments. And then change in working capital is roughly €375 million, which purely comes from inventory. As you know, we wanted to obviously have stable supply to the customers. We need to run the operations in this difficult environment regarding all the supply chain issues, we wanted not to run out. So -- and then coal, pet coke, slag, you all know, this comes with massive cost increases. So our working capital need for inventory is the main difference here.

And then CapEx net is €1.35 billion and we will come later to that in our guidance. We keep our guidance clearly below €1.2 billion. This is just the timing of CapEx which we then clearly reduce in the second half to get to the guidance, and we are very comfortable that we reach that and other provision outflows and currency effects.

So free cash flow is at €1,067 million, which is a cash conversion of 29%. But as you know, working capital will reduce in the second half and our CapEx as well. And we -- the RCOBD will still go up on a reported basis. So we will increase that number clearly.

And then net debt development, yes, we, as I said, a reduction of €662 million. That's a function of free cash flow, net M&A, which is the U.S. West disposal. And then we acquired Command Alkon and CBI in Ghana, the calcined clay project this year. And then the €1.3 billion, let's say, share buyback dividend combined and then on the currency effect of [indiscernible]. So here we are at €6.8 billion per June.

If we then go to the next slide, our P&L, yes. If we go down below RCO, the additional ordinary result, you see there's a minus €210 million delta versus last year. Last year was influenced by the, let's say, impairment reversal due to our U.S. West disposal, which was roughly €130 million. And then this year, -- we had an asset impairment of Russia -- of our Russian business due to the massive increase of the weighted average cost of capital, which is -- which led to an impairment of roughly €87 million for our Russian business.

Financial results, plus €63 million. That is a function of different things. Obviously, lower interest charge regarding our bonds, we paid bonds back and reduced our net debt. That's one function. And then the second one is a discounting of provisions, it gave us a nice positive effect due to the high interest rates.

Income tax was plus €86 million as a function of you see lower operational results. Our effective tax rate is stable compared to last year. So that is driven by our lower operational results. And then you see we come to a group share of profit of €542 million. And the negative things, clearly, the delta and AOR. But if you take that out, earnings per share adjusted are going up by €0.09, which is 3%.

So now, Dominik, I hand over to you to talk about the CO2.

[Dominik von Achten, Chief Executive Officer]

Yes, maybe guys, I didn't want me to skip over Page 5. Maybe I will let you go back to Page 5 to talk a little bit about the area, the area split. That's what I was [technical difficulty] revenue development was okay. And then the operating EBITDA slightly down. We are ambitious guys. The sky is always the limit, but the volume development was stable. Pricing was good and is picking up, further up. So I think that's the trend in the U.S. and Canada is moving absolutely in the right direction.

As we indicated to you earlier, we had a couple of always the balancing act for us importing in the Northeast. It's a balancing act between freight rates on imports, cost of clinker and everything. So we take the right business decision, and then we had also some labor disruption issues.

But as I said, North America, from our perspective, going against a very strong comp last year. And we are very positive the second half in North America. Europe, as I said earlier, from my perspective, very well done, results even up against the record results last year in the quarter, plus 8%.

So I think both WSE and also NEECA, although the result is coming down slightly, I'm not getting too hung up about that. They are stabilizing on a very high level, so both Western Southern Europe and NEECA really driven by very convincing pricing performance, have done an excellent job.

Asia Pacific, I think, the emerging markets in general have a little bit of a slower comeback from corona and also, obviously, now with the energy cost inflation that typically takes them a quarter or two more than the developing countries. We do see clearly a stabilization in Asia Pacific. So we are quite positive for the second half. But the first half was obviously difficult in Indonesia because of the big Gold Coast impact. You know that from the past discussions.

Same is true for India. Bangladesh is a little bit struggling in the first half. And Thailand is now picking up. Also interesting talent is the more developed country already. So you see them coming out of the water better.

And talking about water, that's the story about Australia, although we don't like to talk about the weather. I think it's fair to the Australian team records. And René was in Australia for quite a few years. So record flooding 3x, I think, even in the -- on the East Coast in Australia.

So the underlying business in Australia is strong. So we are also in Australia, positive for the second half. And then last but not least, Africa I think very, very difficult emerging market situation, but the team has done an excellent job in balancing the input cost, increased the availability of clinker and freight and then working also on the pricing side.

West Africa a little bit softer than East Africa, I think that's fair to say, Northern Sahara moving in the right direction. Egypt, just to say that also has clearly stabilized, and this is well way back in positive territory. So that was the only country we were losing money in the past. You know that has clearly come out of the water and is looking strong.

Then last but not least, to finish on the CO2 side, which is very important for us, the CO2 performance in the group was very convincing. As I said earlier, the target on the left was the once communicated at the capital markets. Just to remind you, in the last 32 years, we wanted to come -- we came down 25% in the next 8 years with that CIF target of 400. We wanted to more than a further 30% reduction and obviously [indiscernible] this is very aggressive. Yes, it is aggressive, but we are paid for setting ourselves ambitious target, not overly aggressive.

And then we need to deliver against that. And the train has left the station, and I'm glad to say the train has absolutely left the station in the right manner. We let us measure against what we deliver. And here, we are at least after 18 months now out of the gate from 576 down to 551, that's 25 kilos in just 18 months. I think that's a level nearer and moving absolutely in the right direction.

The very important piece for us is this is not a marketing exercise from René and myself, this is deeply rooted. Deeply rooted in our plants and countries. They really carry the bucket, and I'm very -- with that, I'm very convinced that we will rock the world in that respect. So stay tuned for our journey down to 400.

Last but not least, the outlook. I mentioned that upfront. We keep it stable on the top line side, so strong increase in revenues. And it will be -- the guidance is a slight decrease in operating EBITDA and RCO, but I also shared with you at the beginning, our fighting target is clearly to stick to the old -- to get to the old guidance. Let's wait and see. It will all depend a little bit on the input cost development for the remainder of the year. CapEx will be below €1.2 billion, as we promised, ROIC around 9% and leverage between 1.5x and 2x, no change. So in that respect, we are really looking forward to your questions.

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thank you, Dominik. Thank you, René. Operator, could you start the Q&A, please?

[Operator]

[Operator Instructions]

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

All right. Everybody is familiar with the Q&A process. As I can see in the list, there are many, many questions in the queue already. So please limit your questions to two at a time, no follow-ups, please, for the time being, and we can always jump back in the queue later. First question comes from Paul Roger.

[Dominik von Achten, Chief Executive Officer]

Hi, Paul.

[Rene Aldach, Chief Financial Officer]

Hi, Paul.

[Paul Roger, Exane BNP Paribas]

Hello, guys. So I was on mute. Yes, good afternoon, gents. So yes, I will kick it to two, then. First question is on European gas. I mean, obviously, you don't have a direct exposure of burning gas for your kilns. But -- have you done any thinking in terms of what shortages of rationing over the winter could mean indirectly for you? And I guess, either in terms of demand or maybe supply chains? And then secondly, on the cost side, -- can you remind us how hedged you are for energy in the second half? And what magnitude of cost inflation you're baking into the guidance overall? Thank you.

[Dominik von Achten, Chief Executive Officer]

Yes. Let me take the first one and then maybe Rene goes to the second one and maybe also comment on the first one a little bit because he obviously -- you know that he is over the energy purchasing side. So on the European gas, Paul, as you mentioned rightly, so we are not directly exposed a lot. We have -- our plants are not run by gas. There are small exceptions in the U.K. and in some other countries for drying processes. But this is not critical. This will not take the business down. So in that respect, we do not have a supply issue on gas directly.

Where it obviously impacts us is indirectly on the electricity side because, as you know, in Continental Europe, but not only also outside of Europe, there is a lot of gas-fired power plants. And that is obviously if there is a gas shortage, they need to switch and then it becomes an economic question. So it's not a supply issue from our side. It's an economic decision at some point. At some crazy price development, it becomes less and less interesting to operate. So I think in that respect, that's, I think, the risk going forward is not from our perspective, the supply, even if, and Paul, I say this openly here.

I think Europe is already in its mind prepared for a gas stop out of Russia. We are politically trying to avoid this and we should also economically try to avoid it. But if I listen a little bit around, I understand that most people have prepared for a gas stoppage. So that's also, I think, good news because it will take the speculation out of the price. At some point, that's a little bit my assumption that, that will -- because there is a lot of speculation in this whole pricing on the energy side now. That's at least my view on it. So let's wait and see how that continues, but no direct exposure on the gas or very limited and then an exposure indirectly on the electricity side, that maybe to Rene on the question what's the hedging policy.

[Rene Aldach, Chief Financial Officer]

Thanks, Dominik. So Paul, to answer your question, our forward coverage across the group in terms of electricity, sits around 60% to 70% for the remainder of the year. And then what additional cost we have? Yes, that's difficult to say. It would be not professional if I answer this to you because you see the volatility in the market that swings every day, 20%, 30%, 40%, 50%, even in certain markets. So just, as I said, 60% to 70% forward coverage and to give a precise answer at this point in time, I guess, this would be not professional in fact.

[Dominik von Achten, Chief Executive Officer]

And for that, I think, our management style is being flexible around this because there are -- you can then calculate with forwards and everything. But if you look at the volatility, these forwards even during the day, not even only during the week, they have massive volatility, which also gives us the opportunity whenever it drops to a certain level, we obviously buy additional shares of that coverage.

So I think it's now an hourly, if not minutely exercise to do this. The company is well on its toes to get this done. You know that we have centralized the process quite substantially in that respect, not to buy now on elevated levels into next year. That's not the point, but to really be very, very quick on our decision points on the key commodities.

[Paul Roger, Exane BNP Paribas]

Yes, makes sense. Great. Thank you very much.

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thanks, Paul. Next question comes from Luis Prieto, Kepler Cheuvreux.

[Dominik von Achten, Chief Executive Officer]

Hi, Luis.

[Rene Aldach, Chief Financial Officer]

Hi, Luis.

[Luis Prieto, Kepler Cheuvreux]

Hey, guys. Yes, to ask a couple of things. The first one is volumes were weak in the second quarter. And what dynamics -- you gave us -- you've given us a little bit, but what dynamics are actually in those figures? And how should we think about volume performance in H2? The comparison base, I assume is milder in the second half of the year. And then the second question would be, what happens to pricing if we go into a recession environment? I'm talking hypothetically here, would you expect prices to generally stick? Or would they lose momentum? Thank you.

[Dominik von Achten, Chief Executive Officer]

Well, Luis, the -- that's the $1 billion question, what's the volume and price development? So I think thanks a lot for that question. I think the volume development is very different from market-to-market. Yes, you see a global figure in the end. But I tell you there are markets where the volumes are absolutely up in all business lines. And then there are markets where the volumes are down in all business lines. So I think this is -- it's really a market-by-market dynamic.

Also business line, I think it's interesting to see. The aggregate business line right now holds up a little bit better than the cement and ready mix. Why is that the case? Because if there is a slowdown, I think, it first comes typically on the residential side. I mean the ECB has raised the rate 0.5%. The Fed has raised the rates again, 0.75%, inflation is very high. So I think if you listen to your friends left and right, are they now deciding for a new build house or renovating of the house probably not. So they postponed it. So I think in that respect, the order books are very well filled. I think that's important to understand. The order books are very well filled, but the question is do all these projects now get executed on the residential side. I think there potentially will be a little bit of a slowdown.

On the flip side, we are very positive on infrastructure. There are the programs in place all the way from Australia to the U.S., you go to the EU. You go to the U.K. I mean some of you sit in the U.K. from London to Birmingham, and you see only construction sites all over the place. We are well in the midst of it. So that's, for example, a market which is important for us that will really get some traction on the infrastructure in the second half. So mixed picture, residential, a little bit slower, commercial fairly stable, infrastructure up. That's a little bit then for us, it's one-third, one-third, one-third, just to give you an indication.

On the pricing side, is there a correlation between volume and pricing? Historically, you could make that argument. I said before from our perspective, that may change because that's where our sustainability efforts also come in. From our conviction in the end, it will be a product differentiation issue for the very highest commodity. You may see some more pricing elasticity, but for those products, who have a competitive edge, you will less so see this. That's my conviction. And then it's a matter of timing and how well spread is your product portfolio in that respect. That's why we make such a heavy push on the sustainable revenues and on the sustainability product portfolio. And I see great traction in that respect. And then that should also cast a little bit the historical dynamics between volume and pricing.

[Luis Prieto, Kepler Cheuvreux]

Excellent. [Multiple speakers].

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thanks, Luis for your question. The next question comes from HSBC, Brijesh Siya.

[Brijesh Kumar Siya, HSBC]

Hi, good afternoon. I have two as well. The first one is on North America. If you could please elaborate a little bit more how you are looking at it as you speak, whether things have started improving. And how do you look for the H2. And within H1, whether there was any one-off performance, which kind of impacted that number? And when you talk about the monthly improvement and June being positive, €81 million on price cost, could you give us a little more flavor about which region, which is kind of giving the strongest possible push there? And yes, so that would be great. Thank you.

[Dominik von Achten, Chief Executive Officer]

Yes. First question on North America. As I said, there is good price momentum in the U.S. That's certainly -- and in Canada, so that's certainly moving in the right direction. Then when it comes to volumes, that's a little bit for us impacted by the labor issues that we have mentioned. Some of the labor issues happened in -- for us, a critically important market. And then obviously that pulls also down the volumes.

And the reason you can see it also in the numbers is that the volume development in cement and ready mix is more subdued than it is in aggregate. Because the labor issues typically on the ready mix and on the cement side, not so much on the aggregate side because there's a pickup business in North America. So I think that's for your benefit.

There are no drastic one-offs, but this is a -- if you wish to say this is a one-off because the labor issues are behind us. All business are back to normal in that respect. So if you wish to call this a one-off this is a one-off. But there are no fancy bookings left or right in North America of any meaningful magnitude.

Then on the price over cost side, I think, let's be happy with the €81 million on Group level. But I mean, as you can calculate yourself, this is a good performance in all areas, but a very strong performance in Europe. So I think in that respect, there is a good contribution also coming from Europe, which for us is the critical piece because we’ve a heavy European footprint. That's where the most doubt of -- all of you around the world was sitting, whether we would ever be able to move the pricing in such a necessary magnitude given the high cost inflation. And I think that's why we were razor sharply focused to get our core markets moving. And I think the results speak for themselves.

[Brijesh Kumar Siya, HSBC]

All right. Thank you very much.

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thank you, Brijesh. Thank you. The next question comes from Deutsche Bank, Matthias Pfeifenberger.

[Dominik von Achten, Chief Executive Officer]

Hi, Matthias.

[Matthias Pfeifenberger, Deutsche Bank]

Good afternoon, gents. Two questions from my side. So firstly, on the rates slowdown was that statement of yours regarding H2. Are you already seeing a slowdown, cancellations in new construction, especially residential?

[Dominik von Achten, Chief Executive Officer]

Yes, as I said before, Matthias, I think from our perspective, and you see this also in the announcement of the large homebuilders in the U.S. I think there is a slowdown in residential on the horizon. I think you -- I'm not going to paint the picture. I'm very optimistic for H2, but I'm not going to paint you a rosy picture of everything.

From my perspective, there is a slowdown coming on the residential side, you can always discuss about the magnitude, but let's also keep in mind, this comes out of a 10-year growth cycle that at some point need to come to a slowdown, and that's what we will see. We are not overly pessimistic on this. I think it's not going to fall off the cliff. We are not up for a massive housing crisis. That's not what we see right now. And what happens in 6 to 12 months, nobody can tell you. But is there a slowdown? Yes. Is there a massive drop off? No.

[Matthias Pfeifenberger, Deutsche Bank]

Okay. And the second question is really coming back to North America. You had kind of the best volume development, especially in your biggest business x and still margins are down another 400 bps in Q2, which actually compares on a H1 level is even closer to Asia Pac where you really had a lockdown impact. So what's really happening, is just the labor issues. I mean you started the margin improvement in program a while back. You ran the business for several years. So -- and a lot of your competitors really reported improving margins. So what's the missing piece?

[Dominik von Achten, Chief Executive Officer]

Matthias, I think the life is always -- quarter-over-quarter, there is a life and then we have to also take the longer-term perspective. We've done a diligent analysis also in the benchmark. And I think the aggregates performance overall is, from my perspective, okay, but it's never perfect. I think to answer your question, quarter-over-quarter or half year over half year, you make your point. But if you then go back into '21 and '22 and '20 and take a longer-term perspective, I think, also the volume development and the margin development, I think is in the right direction.

From our perspective, the margin is still ahead of everybody else, but you make your own analysis. Has it come down from a record level last year? Yes. But I would argue, in absolute percentage terms, it's still on a very strong level. And rest assured, we are going to stay very focused on further improving our aggregates business. We stick to our communicated targets until 2025. There is no change. And from today's perspective, I'm very confident that we get there.

[Matthias Pfeifenberger, Deutsche Bank]

Okay. Thanks.

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thank you, Matthias. Next on the Line is Elodie Rall from JPMorgan.

[Dominik von Achten, Chief Executive Officer]

Hey, Elodie.

[Rene Aldach, Chief Financial Officer]

Hi, Elodie.

[Elodie Rall, J.P. Morgan]

Hi, everyone. Thanks for taking my questions. The first one, if I may come back to your hedging strategy you gave us your outlook for this year, but how about 2023? Do you think it makes sense to hedge at these levels for next year? And how much have you already done? And my second question is with regards to your capital allocation strategy. Can you remind us of your main focus? And whether you're looking at some acquisitions at the moment? And maybe whether you think at this stage, it could make sense to also take a little bit out of cement and into light side like some of the peers are doing. Thanks.

[Dominik von Achten, Chief Executive Officer]

Elodie, maybe I let Rene first comment on the hedging, but let's not get too far out. We are giving you the indication for '22, but careful with '23, we have changed our hedging strategy. So let's not get too far ahead of ourselves, but Rene, maybe you can comment on the …

[Rene Aldach, Chief Financial Officer]

Elodie, as we said already in the last call at this super elevated levels, it would be not so clever to lock in now for that period. Obviously, a few months ago, when we changed the policy, we’ve already locked in volumes for 2023, which -- where the costs are much lower than you have now. But let's wait and see how that develops. I think it's by far too early now to talk in detail about 2023.

[Dominik von Achten, Chief Executive Officer]

And we take a longer-term perspective on this. We don't go in the volatile setup. And you know that we now take a longer-term perspective. We changed the policy, we communicated that. And in that respect, we also try to fill the bucket necessary for '23. On your capital allocation question, no change. We always said we're going to stay very focused on our core materials -- and that's what we will do in terms of geographic portfolio. I think we said we are not going to go into South America to make that very clear. We are also not going to additional countries with our core business. We are going to continue to optimize our portfolio.

And in terms of bolt-on, we already said in the last call, we have smaller ones, midsize ones, it can also be bigger ones, if it fits to our core strategy that we've communicated in our capital market and it needs to also, in any respect with every acquisition, with every investment we do now, it needs to support the sustainability story. So I think it's -- whenever we have a discussion around our new Mitchell plant, if we discuss new investments in our core assets. If we discuss smaller, midsize or larger acquisitions, it needs to support the sustainability and/or the digital topic. So in that respect, no change to the capital allocation communicated to [indiscernible] Elodie.

[Elodie Rall, J.P. Morgan]

Okay. Very clear. Thank you.

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thank you. The next question comes from Yuri Serov from Redburn.

[Dominik von Achten, Chief Executive Officer]

Hi, Yuri.

[Rene Aldach, Chief Financial Officer]

Hi, Yuri.

[Yuri Serov, Redburn]

Hi. Good afternoon. So on your pricing, you have very high price increases, 20% from cement is quite spectacular. Going forward, and I'm wondering what sort of discussions you're having with the customers. Steel prices are on the way down and your customers buy steel. And steel is also a very energy-intensive product. I worry how sustainable your prices are. I can easily imagine that the customers will start refusing paying such high prices for cement when other materials are on the way down.

[Dominik von Achten, Chief Executive Officer]

Yuri, I cannot comment on the steel in detail, but I would like to remind you these are statistic that I’ve seen that the steel prices have doubled, if not more. So I saw statistics where the steel price is up 80%, 100% in the last 12 months. We are by far not in that magnitude, I think. So I do not see a big parallel between steel and -- as not in the past. And I'm not sure why it should now. They have been always both energy intensive. So I don't see in terms of pricing a big parallel between steel and cement.

[Yuri Serov, Redburn]

But -- so you're not -- these are not the discussions that you're having so far with any of your customers?

[Dominik von Achten, Chief Executive Officer]

I mean every discussion with our customers does not only talk about price. It talks very much about the sustainability topic, about delivery, about quality. There are four or five different arguments that we have with our customers. I know you all focus and think that we only discuss pricing with our customers. But on this differentiation journey that we are on in terms of making a difference for our customers, we also have a price discussion, but not only have a price discussion. And that's also the reason why my answer to this is I don't expect that there is a pricing only discussion and then we get into the good old commodity game again. This may happen here and there, but it shouldn't happen everywhere.

So we are trying to differentiate ourselves at the customer interface and have a very educated discussion and take our customers along on this transformational journey because for us to transform a loan with all our customers will not work. So we need them aside with us. That's true also for the pricing discussion. And we do this in a collaborative approach with our key customers and our strategic customers. So in that respect, let's wait and see how this works. But do we see -- and that was your question, pricing drop off at this in a larger extent? No.

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thank you, Yuri.

[Yuri Serov, Redburn]

Sorry. Am I allowed to speak still?

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Okay. But do you have a follow-up or -- on your question or …

[Yuri Serov, Redburn]

Only -- I only chipped in half of a question. I mean one of the things -- one of the impressions that I'm actually getting, speaking about prices is that price -- high prices are starting to impact your volumes, especially in Europe. I wonder whether that's the right impression?

[Dominik von Achten, Chief Executive Officer]

This is -- there's not a one-off answer to this. This is almost an account-by-account question. So I -- to the earlier point, I think there is a slowdown in volumes in general in Europe. That's -- again, Europe is not Europe. There is -- the U.K. is different from Continental Europe and even in Continental Europe, the development is different. So careful with the quarter-over-quarter judgment on that.

I think there is -- in some markets, there is a slowdown that I described to you earlier. And I think I'm not making any. And then maybe in one or two of the pricing discussions, we also have to give up some volume. That may be the case. But this is, rest assured, we do this in conjunction with our customers and with a clear focus on making the right economic decision short term and mid-term.

So this is not a quarter-over-quarter game. We are in there for the long run. We don't want to burn any bridges. But is there on the edge of it always also a balance between pricing and volume, absolutely. And if you make too many hoops on the last ton that may also cost you not only marginally, you may not even make a profit on that if you include CO2. So we have to watch the situation carefully.

[Yuri Serov, Redburn]

Okay. Can I just ask the second question. This is about energy. We spoke about this when you were presenting Q1 results. And I wonder what your current take is on the full year energy cost inflation. At Q1, you said 50% to 60% was reasonable. But since then, the energy cost went up further. So what's your current estimate?

[Rene Aldach, Chief Financial Officer]

Yuri, two things here. The first one is obviously that H2 2021 had already elevated cost, yes. And if you now go against that comparison base, and take into consideration the higher energy costs now, we should probably live with a 60%, 65%, let's say, higher cost in H2 this year versus last year, which means against a very high cost base already last year, yes. So that's a little bit what we see right now. But as we all said, it's very volatile, and that's probably the message.

[Yuri Serov, Redburn]

Okay. Thanks. But that's 60% to 65% in H2. What is it if you take the full year as I don't remember reading in your report what it was in the first half?

[Rene Aldach, Chief Financial Officer]

But you have this -- in H1, we had 60%. So -- and then now you can do the math. I guess, H1 60% and H2, roughly the same, just on a different basis.

[Yuri Serov, Redburn]

I understand. Thank you.

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thank you, Yuri. Next one comes from Berenberg, Harry Goad.

[Harry Goad, Berenberg]

Yes, hi. Good afternoon. Thanks for taking my question. Can I just come back to the …

[Dominik von Achten, Chief Executive Officer]

Hey, Harry.

[Rene Aldach, Chief Financial Officer]

Hey, Harry.

[Harry Goad, Berenberg]

… comment that Dominik, I think, you made earlier about infrastructure activity and particularly in Europe. And I take your point about the U.K. But I guess if we think about Continental Europe and I guess some of the EU money, are you actually seeing that coming into the activity this year? Or is that -- was your comment more about expectation for 2023? Thanks.

[Dominik von Achten, Chief Executive Officer]

Harry, I think in the U.K., we seem to agree. On Continental Europe, the picture, there's not one Continental Europe, as you all know. So I think we do see some effect of this in Eastern Europe. We see some effect of it in Western Europe. Do we see already the full effect of it? No. How quickly this kicks in, you know how the distribution in the EU works. That's a cumbersome administrative process. You see the developments in Italy.

So there are market-by-market dynamics that lead to the question, when does the money finally arrive. That it needs to come from the EU level down to the national level, then from the national level to the county level because they take the decision, then you need the permitting done. You have the same dynamics that you have also in the U.S. that the market is even more transparent in terms of national level DOT, gas tax and then travel ready projects as they call them in the U.S. You have a similar dynamic in Europe. So do we expect a massive spike in the second half? I think that would be unfair to say. But do we see a further uptick on it. That's also, I think, our realistic assumption.

[Harry Goad, Berenberg]

Okay. Thank you.

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thanks, Harry. Next question comes from Tobias Woerner, Stifel, Europe.

[Dominik von Achten, Chief Executive Officer]

Hey, Tobias.

[Tobias Woerner, Stifel]

Hey. Thanks for taking the questions. Two as before. Number one, when I look at your price increases 22% in Q2, some of your peers talk about supplements on the one hand, CO2 cost supplements, and on the other hand, electricity supplements, which are variable. What portion of your 22% in Q2 to be specific? Do you estimate relates to the variable bit if you do apply it? That's question number one. And maybe number two question for Rene. Just give us a sense of the free cash flow generation into the second half and what you expect with regard to the net debt development, if possible. Thank you.

[Dominik von Achten, Chief Executive Officer]

We -- I’m not quite sure whether we got your first part of the question, right. If you could -- if you just maybe you also broke off a little bit. Could you repeat, please, exactly your first question?

[Tobias Woerner, Stifel]

Yes. The first question, hopefully, you can hear me now, is the 22% increase in prices in Q2, what portion of that relates to the variable part, which some of your peers are talking about in terms of supplements for the CO2 costs and also electricity costs, which apparently are built on a megawatt basis to some of their customers, if it all applicable to you?

[Dominik von Achten, Chief Executive Officer]

I said, I think, earlier, this is an all-in view. This takes the gross picture. So it takes all additional surcharges and everything that you apply. And I think I shared with you in earlier calls that there is a flat out price increase, but there is also all sorts of surcharges on specific elements in some markets on CO2, but by far not in all. I think sometimes it's baked into the total price increase.

The same is true for the electricity. There are surcharges on electricity in some markets, but clearly not in all markets. So we don't have a group overview. We don't split it necessarily into this variable cost piece. For us, the gross result in the end is important.

So from our perspective, yes, we do have all these different tools available and use them but use them very different in each of the markets, in each of the accounts that we talk to. So in that respect, there is not a flat answer out of it. But there is an element of all of these things in the total performance of 22%. But maybe, Rene, you want to cover the free cash flow one.

[Rene Aldach, Chief Financial Officer]

Tobias, so obviously, the target is still to achieve, let's say, a decent let free cash flow, so we should at least do another €2 billion free cash flow from, let's say, 1st of July to end of December. We will -- as I said, working capital, we should decrease CapEx. We will reduce and then it's down to the operational performance. So I guess, should be -- we should be all in line what we said we're going to do.

[Dominik von Achten, Chief Executive Officer]

Yes. And, Tobias, just to be very clear, we know from our perspective that cash is a key element for us, especially in this current volatile environment. Rene has shared with you details from H1. And as we said, we stick to our guidance also on the CapEx side to come in below €1.2 billion. So in that respect, we are very focused on the free cash flow development.

[Tobias Woerner, Stifel]

Okay. Thanks very much.

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thanks, Tobias. Next in line is Gregor Kuglitsch from UBS.

[Dominik von Achten, Chief Executive Officer]

Hey, Gregor.

[Rene Aldach, Chief Financial Officer]

Hi, Gregor.

[Gregor Kuglitsch, UBS]

Hi. Good afternoon. So I will have two questions. So the first one, please, is whether you've done any contingency planning so that in the event things get a little bit more difficult, particularly in Europe. And I'm thinking for example, timing of maintenance schedules to maybe avoid the sort of peak energy periods in the winter, what happens if there's gas rationing. I guess the question is what have you got in your drawer to kind of protect the business and earnings. And then the second question is, if you can comment if there's further price increases that are coming through kind of sequentially. Sort of maybe broad flavor, I appreciate you don't want to talk about markets specifically, but if you can just tell us whether there's more pricing action underway. Thank you.

[Dominik von Achten, Chief Executive Officer]

Gregor, Thanks for your question. A very simple answer to your first question. Yes, all of the above. So absolutely, we have contingency plans in place, not only generally here on group level, every country has a contingency plan in place. And is wherever necessary already in its execution and all of the tools that you described are part of that and some beyond that. I think that's absolutely moving in the right direction. And the second -- sorry, the second one was?

[Gregor Kuglitsch, UBS]

Where there's more pricing action …

[Dominik von Achten, Chief Executive Officer]

Yes, on the pricing side, I think you saw the Slide 8 that we shared with you. And this is not -- you can argue why did you jump up in the Q2? Well, we’ve talked about this pricing effort. You cannot switch it on like lag bolt. You have to also do this in conjunction with your customer base. So we have worked on this very hard now for 12 months, and we see the results now coming through. But in some markets, these are results coming from price increases from October last year.

Others are price increases from January, others are price increases from March. Others are price increases from June. Are there still price increases out in July? Yes. So we’ve not stopped to work on that. So there is no guarantee to our customer base that we hold prices for the next 12 months. That's not happening. So we stay flexible on an as-needed basis. But there are beyond June, there are already price increases in the market announced in quite important markets for us, but I'm not going to say anything more for competitive reasons, that's clear.

[Gregor Kuglitsch, UBS]

Thank you.

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thank you. Next question comes from Nabil Ahmed from Barclays.

[Dominik von Achten, Chief Executive Officer]

Hey, Nabil.

[Rene Aldach, Chief Financial Officer]

Hi, Nabil.

[Nabil Ahmed, Barclays]

Hi. Good afternoon. Thanks for taking my questions. The first one was about North America. Could you remind us how much cement you import annually, broadly speaking? And has this mix shifted in recent months, maybe with the disposal of the West Coast operations? And maybe related to that, do you have any plan to increase domestic capacity in the U.S. in particular? And the second question. I remember a few years back when we were discussing the carbon ETS reform, there was a view, and I think you shared that view that it could lead to significant capacity closure and/or consolidation in Europe. If we consider the super high inflation, are you seeing anything like that happening? Any small competitors, you know struggling? And related to that, do you have any intention to maybe take advantage of that to consolidate some markets here? Thank you.

[Dominik von Achten, Chief Executive Officer]

Nabil, you are also longer with us. So good questions, both of them, all three of them. I think you sneaked in the 2.5, let's put it that way. So on the import side, yes, it's true with the West Coast disposal, we reduced our import share. That's clear. That was also one of the reasons for the disposal. You know that historically, we are the player in the U.S. that has the highest use and the highest import share, and that has come down since then. Please understand that I cannot share this competitive detail. I cannot share with you the import volumes.

But on the broader sense, yes, the share has come down. And that's for us also good to keep a little bit of this balance. Because as much as this may be a little bit more difficult to manage in the complete peaks of the market it becomes an advantage on the way down because you can switch this off overnight. This you cannot -- so easy to do with your installed capacity.

Second question is the additional domestic capacity coming. Yes, you know that we are in a very competitive one. So as of beginning of next year, we will have our K4 Mitchell plant coming $750 million investment, and that will consolidate [indiscernible]. And that obviously will substantially help us on the cost and margin position but it will also help us on capacity -- on the capacity side.

So in that respect, that's a very interesting asset to come on stream. And on that one, timing is perfect from my perspective. Because even if you would see at some point some slowdown in the U.S., this is highly competitive asset. So in that respect, absolutely going in the right direction.

On the carbon ETS situation, I know your underlying assumption. You've shared that with us. Do we already see significant amount of capital -- of capacity closures in Europe? Not that I'm aware of. Do we see some movement, the 1 buying the other selling, I think not fundamentally. You know that we've done some transactions in Southern Spain, so have some others. But we do not see yet additional movements. Will we see maybe at some point some movement in that respect? For us, let's wait and see for the result development of some of the key European competitors, also the smaller ones. Because this is a rocky time now and whether everybody will be able to pull off will be a pull off difficult to say, it's not for me to speculate.

Are we up there in a large consolidation play in Continental Europe. Let's wait and see. This is only -- we only do this if this fits exactly to our financial metrics and to our sustainability metrics. Otherwise, it doesn't make any sense for us. So we are not going to go there carrying the heads below our armpits. We do this in a very, very cold blooded business decision and take only advantage if this happens, if this makes economic sense for our shareholders and sustainability sense.

[Nabil Ahmed, Barclays]

Okay. Thanks.

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thank you, Nabil. Next on line is Arnaud Lehmann from Bank of America.

[Dominik von Achten, Chief Executive Officer]

Hey, Arnaud.

[Rene Aldach, Chief Financial Officer]

Hi, Arnaud.

[Arnaud Lehmann, Bank of America]

Thank you. Good afternoon. My first question is regarding Africa, which actually has been a decent success story for the Group in the last year. It's been a little bit under pressure in the second quarter. I'm assuming it's cost related. I think the base effect is getting a bit easier in H2. Are you confident that you can start to grow the profit there again into the end of the year? And my second question maybe for Rene, I guess. You don't show that the refinancing schedule in the slides anymore. Could you give us an indication if you have any large maturities coming up? And is the refinancing already getting a bit more expensive, now that the ECB has stopped buying back your bonds? Thank you very much.

[Dominik von Achten, Chief Executive Officer]

Yes, Arnaud, very good. Thanks for making it a 50-50 split, then we bring our CFO also into the picture, that's good. So the Africa situation for us, and you know this, Arnaud, you've been with us for a long time, has been a very small market for us for many, many years. I think the team has done an excellent job to move it to a fantastic profitability level. Now this is going to go in this circumstances going on forever, and we see another record and yet another record. Let's not get too greedy, I would say.

Some of the African countries have to -- are fighting with the current situation in the combination of food supply and also energy supply. Not so much the cost, but it's a supply issue sometimes. So this is a market-by-market exercise. Africa, from our perspective, only works if you look at it from a portfolio. I know many of you had questions that, but to be just in one country in Africa is a gamble. That's the -- you can also go to the casino, we have a well-balanced portfolio in Africa. There is always a market that is down, but there always is the market that is up. That will shift to answer your question specifically.

While some markets have gone well over the last 2, 3, 4 years, they will maybe be a little bit more under pressure while other markets come back up. So we are confident that the overall portfolio dynamics in Africa will work, and we will continue to work on that. We have a very strong management team in place. So yes, there was a little bit of softening. But do we see things falling off the cliff in our African business, clearly not.

[Rene Aldach, Chief Financial Officer]

Arnaud, let me take the second question. Until beginning of '24, so end of Q1, '24, we have no other maturities. So we don't have any need to tap the market. That's for you, let's say, first part of the question. And the second part, obviously, the interest rates are going up, but it's as well a super volatile compared to the, let's say, highest rate we have seen 2, 3 weeks ago. We came already 100 basis points down if you consider the 10-year German bond rate and our handbag spread. So it's very volatile, but obviously, we are not at 1.5% like 3 months ago, yes, that's clear. But we came already down. And as I said, the next 18 months, we have no maturity to come, so no need to tap the market right now.

[Arnaud Lehmann, Bank of America]

Excellent. Thank you very much.

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thanks, Arnaud. Next on line is Yassine Touahri from On Field Investment.

[Dominik von Achten, Chief Executive Officer]

Hey, Yassine.

[Rene Aldach, Chief Financial Officer]

Hi, Yassine.

[Yassine Touahri, On Field Investment]

So, good afternoon. So I've got two questions. First, on the Slide 8 of your presentation, you're showing that the price curves has turned positive in June. And so do you believe that the price cost will remain positive in the next 6 months based on the price increase that you have announced and based on the current energy price? And if so, do you believe that you could overall recover the negative price cost that impacted your EBITDA in H1. That would be my first question.

And my second question is on the U.S. Could you give us a bit more color on your strategy and the industry strategy to switch from ordinary Portland cement to limestone cement. When do you think the ordinary Portland cement will be fully replaced? And what could be the impact on your margin? Could you replace expensive imports by local production? Could you reduce your energy cost? That would be very helpful if you can give us some color on those two issues.

[Dominik von Achten, Chief Executive Officer]

Yes. Yassine, very good questions, both of them. Thanks a lot. Price over cost in the second half, our clear target is to keep that positive. Can we guarantee that? No. But is it our clear target to keep it positive. Absolutely, that's the name of the game, and we stay very focused on that. In North America, as you know, yes, we can do some marketing, but for us, it's key, again, to deliver. And I'm absolutely convinced that we are, by far, the market leader that switched from OPC to Portland Limestone Cement.

In fact, we have invented it almost. And we have -- we are already in the millions in terms of tonnes on Portland Limestone Cement. The growth rate is very substantial in our portfolio, and it will continue to do so. So in that respect, we are absolutely on the right track and it fully supports our sustainability agenda. Are we going to stop there? No. And when do we stop OPC total? I cannot tell you.

We are very focused on sustainability, but we are not stupid. We are not doing stupid things if it's not necessary. So let's wait and see how this develops. But 1 thing is very clear, our sustainable revenue portfolio is sharply increasing also in the U.S. and the PLC is only one small element in that respect.

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thank you, Yassine. And, Cedar Ekblom, you have the honor to finish up the Q&A.

[Dominik von Achten, Chief Executive Officer]

Cedar.

[Rene Aldach, Chief Financial Officer]

Hi, Cedar.

[Dominik von Achten, Chief Executive Officer]

[Indiscernible].

[Cedar Ekblom, Morgan Stanley]

Thank you, Dominik. That’s very kind. I've got one question on alternative fuels. I'm sure that you're trying to increase your alternative fuel rate at the moment, not just because of the energy costs, but also around your ESG ambitions. And I'm sure your peers in Europe are trying to do the same thing. Can you talk to us specifically on the European landscape? What's happening from an alternative fuels perspective when it comes to availability pricing. We know that you get paid to take the product often, but is that changing? It's also not just cement producers that are looking forward to alternative fuels. I assume the steel industry is doing the same. So maybe just a bit of color on what's happening there and whether that can be an incremental headwind from a cost perspective? Thank you.

[Dominik von Achten, Chief Executive Officer]

Yes, Cedar, very good question. I think this has a significant impact, obviously, given the energy cost inflation in general. Now there is not a big answer to that. And I would also broaden the horizon a little bit beyond Europe because for us, alternative fuel is not only a European issue. Just that as a general remark, for us, this is a plant by plant, a global issue. You can do the alternative fuel play also in many other markets. also, especially in the emerging markets.

You may not necessarily -- we may not focus so much on that. But especially when it comes to biomass content, there is a very good play. You can do in emerging markets on this alternative fuel. And although the alternative fuel rate in Europe is already well in the 60s or even higher. The emerging market one is on a lower scale. But that tells you also the room for improvement, just take our Indonesian business. We've talked for a decade now on the call issue. We are rapidly increasing our alternative fuel rates in those countries, and that has obviously a huge lever on the competitiveness of the player.

And by the way, I think we have an advantage being a European player in those markets. I think we have the knowledge and the supply chain to fulfill the massive needs of alternative fuels, especially also in the emerging markets. I come back to your European question. I -- obviously there is no direct link to other energy costs, but the market is the market, and that may also lead to some pricing availability, quality issues in some of the alternative fuels. But that's, Cedar, why we are not focused in each of our plants. We are very cautious to focus on just one supplier or one alternative fuel.

We have deliberately taken the freedom to say we stay very flexible. We made this a purchasing exercise, not an owning exercise because the market is so rapidly changing that if you own it, it's so difficult to react. If you buy it only, you're staying far more flexible. So market-by-market, we look at a very broad supplier base, and we look at a very broad alternative fuel base that then has either biomass content and more or less or this has a 100% biomass content that obviously helps then the CO2 agenda in that respect.

So to draw a line below my longer answer. We are very, very focused on alternative fuels globally. You saw the development earlier in the slide. It's moving absolutely in the right direction. Current alternatives fuel rate in Europe is much higher than in emerging markets. But that gives a much higher room for maneuver in emerging markets, which we rapidly do, but we don't stand still in Europe, and we try to make the best deal in terms of both economic decision, but also sustainability decision because, as I said, it very much depends then also on the biomass rate.

[Cedar Ekblom, Morgan Stanley]

Great. [Indiscernible]. Helpful. Thank you very much.

[Rene Aldach, Chief Financial Officer]

All right.

[Dominik von Achten, Chief Executive Officer]

Thanks, Cedar.

[Christoph Beumelburg, Head, Group Communication & Investor Relations]

Thank you. This concludes our call today. Thank you very much for dialing in. We are going into summer break and then after in September, see you on some of the roadshows and the conferences that we are attending. Until then, stay safe and healthy. Bye-bye.

[Dominik von Achten, Chief Executive Officer]

Have a good holiday, everyone. Bye, everybody.

[Rene Aldach, Chief Financial Officer]

Rene Aldach

Bye.